misterno, does the 87% include bond funds which are only expected to return ~5% or is it limited to equity funds which might reasonably be expected to perform in line with the sp500? the s&p may be a practical measuring stick for fund performance, but it is not representative of a large portion of the fund universe. muni, corp, and govt bond funds, balanced funds, sector funds, international funds, preferred stock funds, convertible bond funds, small cap funds, etc etc. None of these would be expected to perform in line with the s&p.
I’m sure the 87% refers to actively managed domestic equity funds, but good try. BTW - During the 1990’s, not only did the S&P outperform something like 90% of such funds but it outperformed by an average of like 3%/year. In bull markets, the S&P crushes the competition.
In bull markets, the S&P crushes the competition. ~~~ that’s a troubling constraint. if you read the Buffett partnership letters pre-Berkshire Hathaway you will see that he mentions over and over that he expects to underperform the market during bull runs and outperform substantially during bear markets. in his case he outperformed during both. but, the point is that *good* active managers reduce risk dramatically when times are tough. The don’t necessarily differentiate themselves during bull markets. granted there are not all that many good mutual fund managers. one of my fav sayings is, “don’t confuse brains with a bull market.” iow, everyone makes money during bull markets - even uncle louie. but, how many know how to play defense when the market drops 50% like the s&p did recently? i try to avoid these religious arguments because they don’t really go anywhere. the s&p 500 is a great index as long as you know what you’re doing with it. lots of retail investors don’t though - that’s why the average “investor return” on index funds is a tiny fraction of the published time weighted returns.
I look at it this way. Since, collectively, all mutual funds are the market, how can they, after fees, beat themselves? It stands to reason that the aggregate return of actively managed mutual funds will be the market return (say, the S&P 500) - the average expense ratio. I’ve looked at the average return of domestic large cap stock funds and have found that they do indeed miss the market, collectively, by about 1.5%, very close to the average expense ratio.
I’m guessing this is including mutual funds and hedge funds…the majority of hedge funds suck anyway off the bat and there are a TON of them. Also you have to consider that there are a TON of mutual funds out there…little shops, etc. If you compare funds of a certain size to the S&P I’m sure you’d see a significant decrease from 87%. I def agree with one of the previous posters who mentioned the sheep mentality. “Hey buddy, you know why fund managers can’t beat the S&P 500? Because they’re sheep…and sheep get slaughtered” -Gordon Gekko
statistics are tricky little things. what i am questioning is not how to calculate a return. its with the words “all funds”. exactly what does this include? ie what is the data set that was used… all domestic equity mutual funds (no hedge funds included)? all equity funds? all funds that have existed for 5+ years (survivorship bias)? all funds that existed as of the date the article was written? are they including index funds based on something other than S&P? i am not saying that they miscalculated the return. i’m saying that it doesnt seem clear from your post what funds were included in the population that they used in their calculation of the statistic. JDV - you could be right, but my point remains that its dangerous to believe statistics based on someone else’s analysis, when you have no clue what is included in that data set. not just in this case… generally speaking. i take it w/ a grain of salt when someone starts spitting out statistics to me unless then can answer a few basic questions about the data itself
Here’s another “Shhh, don’t tell anyone” secret: The goal of most large cap equity mutual funds isn’t to outperform the index - They’d like to outperform, but the real goal is “Don’t underperform too much”. So they’re forced to be closet indexers, or else they can’t compete in the asset gathering game, which is what it’s really about.
^^ agreed!! if a fund outperforms by too much, it could be an indication of taking on too much risk (depending on the prospectus of course)
the result is not all that suprising…markets are efficient…
It is a nice stat. Mkt is efficient. That said, people know past perf is not indicative of next years perf. Since the avg investor wants to outperform they seek sexy managers with the potential to outperform a benchmark. Davis boasts in a marketing piece their 1-, 3-, 5-, 10-, 15-, & 20- year S&P beating returns in NYVTX, though they have some work to do this year. ANCFX large blend, mixes us and non-us and pounds the s&p. A little homework uncovers some good lt managers that keep pace in bull and outperform handily in bear. Of course, if you are in the J. Hancock Bushwack Fund Class B, well yeah of course you need to move to an index fund.
The real statistic is that if you can beat the market (the market being any benchmark you use whatever it is) then you are in the top 10% of managers out there. Roughly 90% of managers out there underperform the market (when I say market, I mean the benchmark they use) People use these managers because of supposed lower volatility and better consistency.
people use managers because the managers sell their product…
FrankArabia Wrote: ------------------------------------------------------- > people use managers because the managers sell > their product… Oversimplified. Do people own garbage as a result of a salesperson, sure. But that does not mean that others don’t seek out managers for other reasons. Maybe they want to gain access to professional management, an investment philosophy or maybe even a perceived repeatable process that has resulted in a history of peer-beating returns or positive alpha or beating the S&P or whatever. They might be right or wrong but there was a process involved as opposed to a sale. people drive Fords because Ford sells cars…
So the real question is this… Why buy funds from a manager who says they shadow an ETF when you can buy shares of that ETF?
XSellSide Wrote: ------------------------------------------------------- > I look at it this way. Since, collectively, all > mutual funds are the market, how can they, after > fees, beat themselves? It stands to reason that > the aggregate return of actively managed mutual > funds will be the market return (say, the S&P 500) > - the average expense ratio. I’ve looked at the > average return of domestic large cap stock funds > and have found that they do indeed miss the > market, collectively, by about 1.5%, very close to > the average expense ratio. Thank-you Mr Bogle
TPain88 Wrote: ------------------------------------------------------- > I’m guessing this is including mutual funds and > hedge funds…the majority of hedge funds suck > anyway off the bat and there are a TON of them. > Also you have to consider that there are a TON of > mutual funds out there…little shops, etc. If you > compare funds of a certain size to the S&P I’m > sure you’d see a significant decrease from 87%. > > I def agree with one of the previous posters who > mentioned the sheep mentality. > > “Hey buddy, you know why fund managers can’t beat > the S&P 500? Because they’re sheep…and sheep get > slaughtered” > -Gordon Gekko Why don’t these people know the difference between mutual funds and hedge funds? It’s like the difference between a car and a bulldozer. Both useful, but very different.
nolabird032 Wrote: ------------------------------------------------------- > statistics are tricky little things. what i am > questioning is not how to calculate a return. its > with the words “all funds”. exactly what does this > include? ie what is the data set that was used… > all domestic equity mutual funds (no hedge funds > included)? all equity funds? all funds that have > existed for 5+ years (survivorship bias)? all > funds that existed as of the date the article was > written? are they including index funds based on > something other than S&P? > i am not saying that they miscalculated the > return. i’m saying that it doesnt seem clear from > your post what funds were included in the > population that they used in their calculation of > the statistic. > > JDV - you could be right, but my point remains > that its dangerous to believe statistics based on > someone else’s analysis, when you have no clue > what is included in that data set. not just in > this case… generally speaking. i take it w/ a > grain of salt when someone starts spitting out > statistics to me unless then can answer a few > basic questions about the data itself This kind of statistic has been with us for 25 years or something. It just changes slightly depending on time periods, up vs down markets, etc… The vast majority of equity managers underperform their indexes and almost all underperform the S&P if the time scale is long enough. Do a Google search - you cn pull up hundreds of variations on this statistic. Or find anything the John Bogle has written since the guy is positively OCD about these statistics.
JoeyDVivre Wrote: ------------------------------------------------------- > XSellSide Wrote: > -------------------------------------------------- > ----- > > I look at it this way. Since, collectively, all > > mutual funds are the market, how can they, > after > > fees, beat themselves? It stands to reason that > > the aggregate return of actively managed mutual > > funds will be the market return (say, the S&P > 500) > > - the average expense ratio. I’ve looked at the > > average return of domestic large cap stock > funds > > and have found that they do indeed miss the > > market, collectively, by about 1.5%, very close > to > > the average expense ratio. > > > Thank-you Mr Bogle My cover has been blown!
XSellSide Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > XSellSide Wrote: > > > -------------------------------------------------- > > > ----- > > > I look at it this way. Since, collectively, > all > > > mutual funds are the market, how can they, > > after > > > fees, beat themselves? It stands to reason > that > > > the aggregate return of actively managed > mutual > > > funds will be the market return (say, the S&P > > 500) > > > - the average expense ratio. I’ve looked at > the > > > average return of domestic large cap stock > > funds > > > and have found that they do indeed miss the > > > market, collectively, by about 1.5%, very > close > > to > > > the average expense ratio. > > > > > > Thank-you Mr Bogle > > My cover has been blown! Or perhaps Mr. Sharpe…no? Reprinted with permission from The Financial Analysts’ Journal: http://www.stanford.edu/~wfsharpe/art/active/active.htm
Nah - Bogle was saying this stuff in the 1970’s, I think